Investing the Templeton Way

1. Bargain Hunting: Buy When Others Despair

To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate reward.

Maximum Pessimism. The core of Templeton's strategy is to invest at the point of maximum pessimism, when fear and negativity have driven prices to irrationally low levels. This contrarian approach requires going against the crowd and seeking out opportunities where others see only risk. For example, during the Great Depression, Templeton's father bought farms for pennies on the dollar because no one else was bidding. This principle applies to all markets, not just stocks.

Value vs. Price. Templeton understood that the market price of an asset can differ significantly from its true value. He sought to identify assets that were undervalued, meaning their market price was far below what he believed they were worth. This requires a deep understanding of the underlying business and its long-term prospects. He often looked for assets selling at an 80% discount to their intrinsic value.

Emotional Detachment. Successful bargain hunting requires emotional detachment from market sentiment. Investors must be able to act rationally and objectively, even when others are panicking. This means avoiding the herd mentality and relying on one's own analysis and judgment.

2. Global Investing: Cast a Wide Net

Research shows that a stock portfolio with investments around the world is likely to yield, in the long run, a higher return at a lower level of volatility than will a simple, diversified single-nation portfolio.

Beyond Borders. Templeton was a pioneer in global investing, recognizing that the best opportunities are not confined to a single country. By searching worldwide, investors can access a larger pool of potential bargains and diversify their portfolios. He believed that limiting investments to the U.S. was arrogant and shortsighted.

Asymmetry in Pricing. Different countries and markets experience varying levels of optimism and pessimism, creating asymmetries in asset pricing. This means that stocks may be a better bargain in one country than another. For example, in the 1960s, Japanese stocks were trading at a P/E of 4x while U.S. stocks were at 19.5x, despite Japan's higher growth rate.

Diversification Benefits. Global diversification reduces risk by spreading investments across different economies and currencies. This helps to mitigate the impact of any single market downturn and provides a more balanced portfolio. The "Periodic Table of Investment Returns" demonstrates how different markets rotate in performance.

3. Patience and Perspective: The Long Game

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

Long-Term Vision. Templeton emphasized the importance of a long-term perspective, focusing on the underlying value of businesses rather than short-term market fluctuations. He often looked five years or more into the future when making investment decisions. He believed that the market eventually will recognize what you already know.

Contrarian Mindset. Successful investing requires a contrarian mindset, going against the prevailing sentiment and acting independently. This means being comfortable with being unpopular and not needing confirmation from others. He often said, "People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable?"

Psychological Fortitude. Patience is a key virtue for value investors. It can take time for the market to recognize the true value of an investment. Investors must have the psychological fortitude to stand pat during periods of underperformance and not be swayed by short-term market noise.

4. Value Over Popularity: Seek the Unloved

In almost every activity in life people try to go where the outlook is best. However, my contention is that if you are selecting publicly traded investments, you have to do the opposite.

Avoid the Crowd. Templeton advised investors to avoid popular stocks and instead seek out companies that are out of favor, neglected, or misunderstood by the market. These are the stocks that are most likely to be undervalued. He believed that "sometimes the cause of higher prices is higher prices."

Skepticism is Key. Bargain hunters must be skeptical of well-told stories about companies and their prospects. Instead, they should rely on their own assessment of whether the stock price is far enough below what they believe a company is worth. He said, "Sometimes the cause of higher prices is higher prices."

Numbers Don't Lie. Templeton used quantitative measures, such as P/E ratios, price-to-sales, and price-to-book ratios, to identify undervalued stocks. He often looked for stocks trading at no more than five times his estimate of earnings five years into the future. He also looked for stocks trading at 80% below their intrinsic value.

5. History Rhymes: Learn from the Past

History shows that people overreact to surprises in the stock market. They always have and always will.

Patterns of Behavior. Templeton believed that history provides valuable lessons for investors, not because events repeat themselves exactly, but because patterns of human behavior tend to recur. He studied past market manias and crashes to understand how investors react to fear and greed. He said, "History doesn't repeat itself, but it does rhyme."

Overreaction to News. Investors tend to overreact to surprises in the stock market, creating opportunities for bargain hunters. This overreaction is often driven by emotions rather than rational analysis. He said, "Sometimes the cause of higher prices is higher prices."

Anticipate Surprises. Successful bargain hunters anticipate and look forward to market surprises, knowing that these events will create opportunities to buy cheap stocks. They view volatility as a friend, not an enemy.

6. Bonds are Not Boring: A Safe Haven

There is a tradition throughout human history that bonds have been the normal way for a long term investor to invest.

Bonds as a Hedge. While often overlooked, bonds can be a valuable tool for investors, particularly during periods of market uncertainty. They can provide a safe haven when stock markets are overvalued or volatile. He said, "Right now bonds are the best buy."

Inverse Relationship. Bond prices and interest rates move in opposite directions. When interest rates fall, bond prices rise, creating opportunities for capital gains. He understood that the Federal Reserve would lower interest rates after the dot-com bubble burst.

Carry Trade. Templeton used carry trades, borrowing at low rates (like in Japan) and investing in higher-yielding bonds (like Canadian Treasuries), to enhance returns. He also favored zero-coupon bonds, which are more sensitive to interest rate changes.

7. Crisis Equals Opportunity: Embrace the Chaos

When written in Chinese, the word “crisis” is composed of two characters—one represents danger, and the other represents opportunity.

Volatility as a Friend. Market crises and panics create the best opportunities for bargain hunters. These events lead to extreme volatility and mispricing, allowing investors to buy assets at deeply discounted prices. He said, "The best time to buy is when there’s blood in the streets."

Temporary Setbacks. Crises often create temporary problems that are exaggerated in the minds of sellers. Bargain hunters must be able to distinguish between temporary setbacks and permanent impairments to a business. He said, "People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable?"

Long-Term Perspective. By taking a long-term perspective, investors can see past the immediate fear and uncertainty of a crisis and focus on the long-term value of the assets they are purchasing. He said, "The time to reflect on your investing methods is when you are most successful, not when you are making the most mistakes."

8. The Extra Ounce: Diligence Pays Off

Genius is 1 percent inspiration and 99 percent perspiration.

Hard Work is Key. Templeton believed that success in investing, as in any other field, requires hard work, diligence, and a willingness to go the extra mile. He called this the "doctrine of the extra ounce." He said, "Genius is 1 percent inspiration and 99 percent perspiration."

Deep Research. Successful bargain hunting requires deep research and a thorough understanding of the businesses and markets being considered. This includes studying company financials, industry trends, and competitive landscapes. He said, "Sometimes the cause of higher prices is higher prices."

Original Analysis. Bargain hunters must be willing to do their own original analysis and not rely solely on the opinions of others. This means challenging conventional wisdom and seeking out information that is not widely known. He said, "People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable?"

9. Beware the Bubble: Avoid the Hype

The four most expensive words in the English language are “this time it’s different.”

Recognize the Signs. Templeton was wary of market bubbles and manias, recognizing that they are often driven by irrational exuberance and unrealistic expectations. He understood that "the cause of higher prices is higher prices."

Avoid the New Paradigm. He cautioned against the belief that "this time is different," a common refrain during market bubbles. He knew that the basic principles of value investing always apply, regardless of the prevailing market sentiment. He said, "The four most expensive words in the English language are “this time it’s different.”"

Short Selling Opportunities. Templeton was not afraid to short sell overvalued stocks, recognizing that bubbles eventually burst. He used his knowledge of lockup periods to time his short positions in the dot-com bubble.

10. Thrift and Service: A Noble Purpose

Do something where you’re performing a real service for people. It’ll be a success.

Thrift as a Virtue. Templeton's early life experiences instilled in him a deep respect for thrift and saving. He believed that saving was a virtue and that his role as an investor was to help others create wealth and security. He said, "Do something where you’re performing a real service for people. It’ll be a success."

Service to Others. He saw his work as a fund manager as a way to serve others, helping them achieve their financial goals and improve their lives. He believed that success is measured by the ability to enable clients to send their children to college or plan for retirement.

Beyond Financial Returns. Templeton's focus extended beyond financial returns to include a desire to make a positive impact on the world. This is reflected in his philanthropic work through the Templeton Foundations.

Last updated: January 14, 2025